Q3 2024 Kornit Digital Ltd Earnings Call
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Speaker Change: Ladies and gentlemen, good morning and welcome to the corner digital third quarter 24 earnings content call.
Speaker Change: At this time, all participants are in a listen-only mode, a brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and the arrow on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Jared Maymon, in western relations for Connet Digital. Please go ahead sir.
Jared Maymon: Thank you, Operator. Good day, everyone, and welcome to Corny Digital's third quarter 2024 earnings conference call. Joining me today are Chief Executive Officer Ronen Samuel and Lauri Hanover, Corny's Chief Financial Officer.
Speaker Change: For today's call, Ronen will provide comments in the third quarter of 2024.
Speaker Change: Lauri will then review the third quarter numbers and provide our fourth quarter outlook before we open it up for Q&A.
Speaker Change: Before we begin, I would like to remind you that forward look statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. securities laws will be made on this call.
Speaker Change: These forward-looking statements include, but are not limited to, statements relating to the company's plans, strategies, projected results of operations, or financial condition. And all statements that address developments that the company expects will occur in the future.
Speaker Change: Forward-looking statements are subject to known and unknown risks and uncertainties that could cause results to differ materially from those implied by the forward-looking statements.
Speaker Change: I encourage you to review the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 20-F filed with the SEC on March 28, 2024, which identifies specific risk factors that could cause actual results to differ materially.
Speaker Change: Any forward-looking statements are made currently, and the company undertakes no obligation to publicly update any forward-looking statements except as required by law.
Speaker Change: At this time I'd now like to turn the call over to Ronen. Ronen?
Ronen Samuel: Good morning everyone and welcome to our third quarter 2024 earnings conference call.
Ronen Samuel: Today, I am pleased to report revenues of $50.7 million and adjusted EBITDA margin of 2.9% both within the guidance ranges we set in August.
Speaker Change: Achieving positive EBITDA and generating cash from operations this quarter underscores our disciplined focus on cost control, working capital improvements,
Speaker Change: This shift reflects a more profitable sales mix and higher margin products and services.
Speaker Change: showcasing the operational gains we are realizing as we transform our business model.
Speaker Change: Our revamped go-to-market strategy is unlocking significant new market opportunities.
Speaker Change: outdated fashion supply chains are struggling to keep pace with today's demands for speed, creativity and sustainability and brands are urgently seeking agile production solutions.
Speaker Change: Kornit's offerings meets these needs precisely and we are seeing accelerating demand for analog screen production to digital conversions.
Speaker Change: Our Apollo system, coupled with the new all-inclusive CLIC, or AIC, model, is driving this shift, with 12 out of 15 Apollos already shipped this year, and the reminder, scheduled to deployment before peak season.
Speaker Change: We are collaborating with industry leaders like Print Palace and T-Formation and our pipeline of pure play analog screen businesses interested in Apollo and Max technology continues to grow.
Speaker Change: Our AIC model is a key driver, addressing the multi-billion impression analog screen replacement opportunity by lowering the barriers of entry for high-volume manufacturers seeking transition to digital production.
Speaker Change: AIC provides a predictable cost structure while eliminating the need for capital investment, enabling manufacturers to leverage digital agility while meeting the quality demand of global brands and retailers.
Speaker Change: This quarter, we also shipped multiple Atlas MAX systems on AIC model and have added promising new opportunities for AIC on MAX into 2025.
Speaker Change: This combination of our innovative technologies and this powerful business model is expanding our market reach and accelerating the industry transition to on-demand digital production.
Speaker Change: Looking ahead to 2025, we are on track to deliver 30 Apollo systems with approximately 20 expected to be on AIC model.
Speaker Change: We already have a thin visibility on more than half of these systems, with some as confirmed orders.
Speaker Change: This aligns well with our long-term financial targets, which includes double-digit revenue growth and growing base of recurring revenues from AIC and enhanced profitability.
Speaker Change: Beyond progress with Apollo and AIC, during the quarter we upgraded some of the Atlas fleets of our global strategic account to the Atlas Max.
Speaker Change: We are also advancing and seeing momentum in the roll-to-roll business, particularly in the footwear market.
Speaker Change: In China, we are making significant progress in this market, with both existing and new customers.
Speaker Change: A strategic customer, already using our technology, has received large orders from major brands and is now ramping up production with our Presto Max systems.
Speaker Change: This growth presents potential for expansion with additional systems early next year.
Speaker Change: We have also secured a new order from another prominent player in China's footwear market, both of whom supply two major global brands.
Speaker Change: for continued success in our roll-to-roll into 2025.
Speaker Change: As we enter fourth quarter peak season, the market is showing continuous signs of improvements validated by strong consumable and systems order for Q4 delivery. This visibility, paired with the growing momentum of AIC,
Speaker Change: support our expectation for gradual recovery and the year-over-year growth in Q4, consistent with our guidance for H2 to be at least 20% higher than H1.
Speaker Change: In closing, we are seeing good signs of stabilization and recovery, which are driving anticipated improvements in revenue growth and profitability.
Speaker Change: Cornett is well positioned to lead the digital transformation of the textile industry.
Speaker Change: Brands and retailers need agility and our solutions meet these demands of speed, quality and sustainability.
Speaker Change: Supported by the recurring revenue from AIC and our industry leadership technology, we are confident in Kurnit's path towards 2025, delivering value for our customers, shareholders, and employees alike.
Speaker Change: Now let me turn the call over to Lauri for a closer look at our Q3 results and guidance for the fourth quarter.
Speaker Change: Okay.
Lauri Hanover: Thank you, Ronen, and good day to everyone. Third quarter revenues were $50.7 million, within the guidance range of $48 million to $52 million we provided in August.
Speaker Change: Moving to margins.
Speaker Change: Third quarter non-GAAP gross margin reached 50.3% compared with 37.4% in the same period last year.
Speaker Change: The year-over-year improvement is largely attributable to a favorable mix shift as high-margin consumable sales represented a higher proportion of overall sales, no warrant impact, and lower inventory adjustments.
Speaker Change: Sequential improvement was driven principally by volume gains.
Speaker Change: looking at operating expenses.
Speaker Change: Total third quarter non-GAAP operating expenses were $26.8 million, a decrease of $4.3 million or 14% from the $31.1 million in the same period last year.
Speaker Change: The reduction in expenses reflects continued progress toward our goal of reducing operating expenses by 20 million dollars year-over-year and is driven primarily by the cost savings and restructuring initiatives implemented earlier this year.
Speaker Change: Moving to profitability. Third quarter adjusted EBITDA was positive $1.5 million. This return to positive adjusted EBITDA is a significant improvement versus the negative $5.6 million we reported in the same period last year and the negative $1.6 million we reported last quarter.
Speaker Change: Adjusted EBITDA margin for the third quarter of 2024 was positive 3% within the guidance range of 1% to 6% we provided in August.
Speaker Change: Our balance sheet remains robust, with our quarter-end cash balance, including bank deposits and marketable securities, increasing to $561 million.
Speaker Change: Operating cash flow, less capital expenditures, and investment in long term assets in Q3 was $3.1 million, including $1.5 million of restructuring outlays.
Speaker Change: and compared with negative 8.7 million in the same period last year.
Speaker Change: This improvement in year-over-year free cash flow is attributable to cost savings and restructuring initiatives implemented earlier this year, in addition to strong collections.
Speaker Change: As we shared at the investor event, growth investments in our AIC program are treated in the consolidated statements of cash flows as investments in long-term assets and are presented under cash flow from investing activities.
Speaker Change: In Q3, approximately $10 million of growth investments in our AIC program were reflected under cash from investing activities.
Speaker Change: Thus, reported cash flow from operating activities was $13.6 million in Q3 and investments in long-term assets and capital expenditures were $9.7 million and $0.8 million respectively.
Speaker Change: Moving on to our share repurchase program. According to Israeli law we were subject to a 30-day waiting period which concluded during our blackout period ahead of Q3 earnings.
Speaker Change: As our blackout period concludes following earnings, we will be able to begin repurchasing under our new $100 million repurchase plan.
Speaker Change: As Ronen mentioned, we are on track to ship 15 Apollo systems by the end of this year, with 10 of those and a growing number of Atlas Max systems using the AIC model. This is expected to provide a solid base of recurring revenue going into 2025.
Speaker Change: Looking ahead, we plan to ship 30 Apollo systems in 2025, 20 of which we expect to be on the AIC model, along with more Atlas MAX systems. This will expand our base of recurring revenue, making it a more significant part of our overall revenue.
Speaker Change: Turning to fourth quarter guidance
Speaker Change: We currently expect to meet our target of at least 20% revenue growth in the second half of this year versus the first half and positive adjusted EBITDA for the full year
Speaker Change: Accordingly, for the fourth quarter of 2024, we currently expect revenues to be between $58 million and $63 million, and adjusted EBITDA margin to be in the 12 to 16 percent range.
Speaker Change: That concludes our prepared remarks and with that I will now turn it back over to Ronen to open the call up for Q&A. Ronen?
Speaker Change: Thank you for watching!
Ronen Samuel: Thank you, Lauri. Operator, please open the line for Q&A.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting our question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Ladies and gentlemen, we will wait for a moment while we poll for questions.
Speaker Change: The first question comes from Chris Moore with CJS Securities. Please go ahead.
Chris Moore: Hey, good morning, good afternoon guys. Thanks for taking a couple questions.
Chris Moore: Paul, any momentum in the overall market?
Speaker Change: Yeah, Chris, thank you very much for the question. Overall, what it's clearly been seen this quarter is that brands, retailers, the entire market is shifting into on-demand production.
Speaker Change: They need the creativity to bring new SKUs to the market and sustainability becoming more and more important.
Chris Moore: Overall, they need the agility, and the agility they can get through the on-demand, which our technology has the perfect fit to meet those needs.
Chris Moore: We see overall market recovery and stabilization.
Chris Moore: It's too early to say that we're out of the woods.
Chris Moore: We can see movement from screen to digital when we are talking with large manufacturers for brands. They are talking about brands of
Speaker Change: coming back with large orders and we see retailers adopting their on-demand production.
Speaker Change: Overall, I can say that I'm pleased with our operational progress this quarter.
Speaker Change: We have set clear targets to our business looking into 2024.
Speaker Change: We said very clearly a few months back, we would like to see H2.
Speaker Change: growing by 20% versus H1. We said very clearly that we would like to be on adjusted EBITDA margin positive for the full year, and we are tracking very, very well.
Speaker Change: Q3
Speaker Change: set the tones for the ear. Overall, in Q3, we saw the sequential growth on system. Finally, we start to see system growth.
Speaker Change: We saw a major improvement on the margin, we bought positive EBITDA as we promised.
Speaker Change: We brought positive cash flow, as we promised, and we overall met our expectation in terms of cost structure that we brought and OPEC's expenses.
Speaker Change: Overall, for the OPEX, as Lauri mentioned on the prepared notes, we see a $20 million reduction versus last year, and this shows an excellent execution by the team in setting the business.
Speaker Change: into a continual profitable growth moving forward.
Speaker Change: I'm also very, very pleased this year, and specifically in Q3, about the execution, execution on the Apollos, on the new product introduction. This is the first year of the Apollo, with a great exception by the market.
Speaker Change: I'm very pleased with the introduction of the MaxPlus and the upgrades across the fleets of our install base with the Plus. I'm very happy with the momentum that we see in the roll-to-roll and the upgrades that we are concluding on the Atlas, from Atlas to Atlas Max.
Speaker Change: We also introduced for the first time this quarter the AIC for the Atlases, following the AIC for the Apollo.
Speaker Change: and we see a great reception. It's opening for us totally new markets, opening for us new customers.
Speaker Change: and they see the benefit of aligning their revenue into the cost of having predictable costs.
Speaker Change: and it's really opening for us new opportunity and we shipped many systems.
Speaker Change: during Q3, both on the Apollos and Atlas Maxis that are going to generate a nice recurring revenue during, already Q4 we'll see some of it, but definitely into 2025.
Speaker Change: Those technologies really open for us massive market opportunities. We are talking about the Bar-Capel for the first time. We are entering big time there. We see expansion of the sum by $6 billion impression.
Speaker Change: XVI opening for us for fashion, but
Speaker Change: specific segment like footwear is a massive segment. When we see advancements there with new customers in China and existing customers that finally is growing and getting into production.
Speaker Change: opening for us new markets like the home decor and what we see also we see some recovering of customer in the customized design. We see growth in the customized design and some of them getting into requiring additional capacity and getting into additional systems into their fleet.
Speaker Change: Overall, we are working very hard to make Vampire go to market. We are bringing super talents to our team.
Speaker Change: moving from selling boxes to selling solutions and helping our customers to grow their impression. The AIC model forcing us to work hand-in-hand with our customer which is great that will drive both benefit to our customers and for Cornit.
Speaker Change: On top of that in the Q3, I mentioned in a preparing remarks that we started to implement some upgrades to our global strategic account from Atlas to Atlas Mark.
Speaker Change: And at this stage, it looks very successful. On top of that, we see strong momentum in the Apollo.
Speaker Change: In Q3, as of today, we already shipped 12 out of the 15 systems.
Speaker Change: We are planning to shift all the 15 before the peak season and we are already prepared for the 30 units for next year, which we have a hard commitment for more than half of them already.
Speaker Change: As I mentioned, the AIC together with the Apollo and together with the Mars is really opening for us new opportunities in the market.
Speaker Change: who is scaling up, of course, the Apollo into the market.
Speaker Change: Kornet is in a turning point right now and with the current market.
Speaker Change: evolving and improving with current technologies that we have with the new business model and the execution that we showed in 2024. I'm confident that we'll have a solid 2025 and continue acceleration in the coming years.
Speaker Change: Got it. Very helpful. Just one quick follow-up.
Speaker Change: on the Apollo. So it sounds like two-thirds are going to be shipped both this year and next year under the AIC model.
Speaker Change: Just trying to understand where is the crossover when it becomes, you know, more effective to buy the Apollo upfront versus the AIC model? Is it X number of garments per day, per year, or just, you know, how you or customers think about that?
Speaker Change: Yeah, so as I mentioned, the AIC is the new business model and we are running it in parallel to the CAPEX. We see today...
Speaker Change: in general, and is that new customers...
Speaker Change: mainly from screen market, that getting for the first time into digital, they are looking for predictable cost.
Speaker Change: which they didn't have an experience before. And the AIC model provide them predictability. They know exactly how much every impression will cost them.
Speaker Change: Also, they have the volume that they know that they can move from analog, from screen to digital, which reduces a lot of their risk on the commitment that they are taking in front of them for the next five years on this model.
Speaker Change: So this model is a great fit for those customers that are a bit risk averse on the cost and getting for the first time into digital.
Speaker Change: On the other hand...
Speaker Change: customers that are already using Kornit.
Speaker Change: Sometimes they have the volume, they might do the calculation and find that
Speaker Change: If they take the systems on CAPEX and buy separately the ink and the services from us, they might find it a bit cheaper than the AIC model.
Speaker Change: So it's a great fit for different types of customers.
Speaker Change: And right now we see a great adoption on the AIC. We believe this momentum will continue to many net new customers and those that would like to expand further and have some limitation on CAPEX.
Speaker Change: And therefore, at this stage, we are focusing that 75% of our DTG business, mainly from Apollo and Atlas Maxis moving forward, will be on AIC versus the 25% on CAPEX.
Speaker Change: Got it. Very helpful. I'll jump back in line.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from the line of Greg Palm from Craig Hallam Capital Group. Please go ahead.
Greg Palm: Good morning, thanks for taking the questions and helpful answer on the first answer, Ronen. Thanks for that, a lot of color. When you kind of put that all together,
Speaker Change: How does that make you feel about, you know, 25 just given, you know, ramp up of, you know, Apollo. You've got maybe a little bit of a stabilization or recovery in the base business.
Speaker Change: You know a couple other sort of one-offs in terms of order activity You know sort of in light of kind of your you know longer term mid-teens Kagger I'm just kind of curious what your what your thoughts are overall next year
Speaker Change: Yeah, thanks Greg. So first of all, you know, we gave a longer term kind of directional Doing our investor event about one and one and a half months ago. We didn't give specifically
Speaker Change: guidance for 2025 and I prefer not to get into specific guidance for 2025 you probably will hear more on our next call in December how do we color 2025
Speaker Change: However, with all what I explained before, we see growth. We believe in growth. We believe that this year will be a year that we will see profitability.
Speaker Change: But we need to take it in cautions and the caution is because one the market is still volatile
Speaker Change: Second, we are changing our business model.
Speaker Change: and we are investing in new salespeople, in education, changing a lot of the DNA of the company.
Speaker Change: and I would say that 2025...
Speaker Change: We believe that more acceleration will come into 2026 and beyond.
Speaker Change: Yep Understood. I know you got a lot of puts and takes with you know more of this business going through AIC so thought thought that was a good sort of first
Speaker Change: In terms of your global strategic, you talked about initial upgrade orders, can you give us a little bit more sense on how that went, I don't know if it's too early for feedback, but in terms of what plans are for potentially more upgrades and even capacity additions at some point in the future, maybe give us a little bit more color on that as well, thanks.
Speaker Change: We'll receive an order next year on additional update the potential is massive we don't know if they will decide to upgrade some older fleet, there hopefully or not at all.
Speaker Change: At this stage, we are hopeful and we believe there will be momentum into <unk> 'twenty 'twenty five.
Speaker Change: Just curious at what point might you have better visibility I mean is it something shortly after this peak season.
Speaker Change: You know kind of figure out the success or would it be more like you know as you know at this point next year or I guess in September when you I guess talk.
Speaker Change: <unk> announced that initial initial upgrade order.
Speaker Change: But we are in.
Speaker Change: In consulting engagement with them on a weekly basis, we have a few be honest with them, we have a face to face with them and they need to close their ear in the financials here and only then we'd probably will get indication for next year. So I really don't want to get into the timeline I leave it to them.
Speaker Change: Have a great partnership with them.
Speaker Change: Hopefully, we will be able to come early next year or by the end of this year to report on.
Speaker Change: There are some indications that began with a commitment that we got from.
Speaker Change: Global strategic customer.
Speaker Change: Okay, great vessel Opex.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from the line of Erik Woodring from Morgan Stanley. Please go ahead.
Erik Woodring: Great. Thanks, so much for taking my questions I have two as well.
Speaker Change: And I know a large part of your kind of broader thesis for this business has been about the shift from analog to digital but it does feel like your conviction and that shift has gotten stronger and I'm just and I'm. Just wondering if my interpretation of your comment is right.
Speaker Change: And if so what is changing what is driving that higher conviction what is driving the acceleration in the shift is it go to market is it is it really a I see I'm just I'm just really trying to understand if you think the momentum is changing its what im hearing your voice, but just wanted to confirm that and if it is you know what.
Speaker Change: What are the underlying drivers of that are of that change in your mind and then I have a follow up thanks.
Speaker Change: Yeah, Thanks, Eric, Yes, I'm I'm more conviction.
Speaker Change: Super confident that this market needs to change and is moving to on demand is moving large portion to digital it will take time, it's not in one day, but we see we see it from different angles. One angle of course is the market. When you talk to any brand any retailers. They would tell you that they cannot anymore.
Speaker Change: We'll wait for products to be in the market four months they needed from today to two more speed to market is crucial.
Speaker Change: Production is moving as close to the consumer and brands and retailers are placing order from today to two more.
Speaker Change: Flexibility in terms of an order form from brands and retailers is crucial they don't want to keep inventory, but that they are all being much shorter run and moving into shorter arms midrash for retailers and brands make a lot of Oh.
Speaker Change: Economic sense to move into digital production.
Speaker Change: Being able to do it in a sustainable way way without waste with pigment or why the full agility.
Speaker Change: So from a market perspective, we see it's clear and we see the move to onshore and near shore as I mentioned textile market today and in the U S.
Speaker Change: Ordering more a new show from from Mexico is today versus the China. So it's a massive shift.
Speaker Change: The other area is of course the technology in.
Speaker Change: In the past our technology.
Speaker Change: Wasn't the right fit to capture Mitra and to meet the quality standards of brands and retailers with the Max technology, We are meeting the standup and even above the expectation of brands and retailers.
Speaker Change: Paulo, we are really getting into mid rise and we can shift large quantities out of home screen into digital. So this is the second pillar and the third pillar, we ask ourselves how to accelerate the move into digital and when we are talking with many.
Speaker Change: St Peters for them investment of 1 million, all a $1.8 million in our polo. It's a it's a massive I'm not everyone has the capital and the risk of this.
Speaker Change: Changing our business model and innovating the all inclusive.
Speaker Change: While leveraging.
Speaker Change: Our balance sheet, our strong balance sheet. This is the best way to accelerate the growth of the all demand into digital and the move to digital and creating a.
Speaker Change: Carrying a healthy kind of busy.
Speaker Change: Business moving forward, which we believe that it will be very healthy already in 2025, and hopefully as we mentioned.
Speaker Change: Q1, we will start reporting on the a out of that.
Speaker Change: We are we signed with our customers and on the systems that they don't they are in the field.
Speaker Change: So those are all components and of course on top of that is the revamp of our go to market, bringing experts that are coming from the screen market, bringing people that know how to manage big accounts speak with the C level and work.
Speaker Change: With them hand to hand, north about selling boxes, but really moving volume.
Speaker Change: From analog to digital this is the focus that we are putting right now and we see the result, we see the resolved with exempt. The example of a principle of deformation.
Speaker Change: <unk> of a custom ink that actually is not buying system, but is going to transition.
Speaker Change: Millions of millions tens of millions of impressions into digital and specifically to coordinate.
Speaker Change: So those all are massive opportunities and we see that transition happening.
Speaker Change: Great that is a that is really helpful. Thank you for all that color on them.
Speaker Change: Maybe maybe my second question is just kind of a kind of taking what you guys have done this year in terms of exhibiting your cost discipline and I'm wondering how much more kind of gas you have in that tank, meaning obviously, you're kind of responded to the uneven demand environment. This year.
Speaker Change: With a renewed focus on profitability and cost and as you look to next year I know, you're not guiding but again youre. Your comments are directionally positive and.
Speaker Change: And I'm just wondering.
Speaker Change: Is there more cost discipline that you can exhibit to drive leverage in that model again, your long term guidance would say, so but I'm just maybe more focused a bit on the next 12 months how much cost discipline. You think you could exhibit and what that might do from an operating leverage standpoint in your model and that's it for me. Thanks, so much.
Speaker Change: So I'll start with maybe low end will add something to add on top of me. So again as you mentioned, we are not guiding for 2025 on our long term model as we mentioned.
Speaker Change: We see an improvement in the EBITDA and EBITDA margin adjusted <unk> adjusted EBITDA margin into the 25%.
Speaker Change: <unk> and gross margin expanding into the 55%.
Speaker Change: We believe that some of it you are going to see in 2025.
Speaker Change: You will see improvement in profitability in 2025, and we believe that you will see expansion over all in the gross margin for the full year in 2025.
Speaker Change: But I don't want to color is right now how much are we worked hard on the next call. It would provide some kind of directional for the EU Dolby anything to it maybe I'd just add one thing first of all we have a clear focus on driving as much efficiencies as we can in all parts of our business, but we did say in September that we were lucky.
Speaker Change: And to reallocate resources.
Speaker Change: One bucket that served that purpose, let's say in 2024 and drive those resources to grow our business for 2025 and beyond.
Speaker Change: Okay very helpful guys. Thanks, so much and congrats on the quarter good luck.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of Jim Ricchiuti from Needham and company. Please go ahead.
Jim Ricchiuti: Thank you just on the Apollo systems that you're expecting to install next year the 30 systems.
Speaker Change: Many of those would represent.
Speaker Change: Multi unit customers and you know and maybe you could tell us how many you would anticipate being entirely new customers.
Speaker Change: Thank you Jim.
Speaker Change: Good question as we mentioned for next year, we are planning to deliver.
Speaker Change: Deliver 30 systems into the field on top of the 15 of this year and and also we mentioned the top of the 36 to have about 20 of them will be on all inclusive.
Speaker Change: We have a very healthy funnel.
Speaker Change: Net new customers, but also existing customers now we need to understand that we are targeting with their colo and with also the AAC incremental volume we are targeting really screen printers, and we are targeting our own install base, but they have a few.
Speaker Change: Late of Carlos of Theyre doing it on screen and now they have the opportunity to shift a to shift the volume from screen two eh.
Speaker Change: Digital specifically to our Colo and some Atlas Mark says, if it's on AAC or not on AAC.
Speaker Change: As you were asking about next year, how many of them will be net new it's too early to say what are we already mentioned in now.
Speaker Change: Beyond that we have released during the quarter. We have one customer that are is growing very nicely on their Colo D. C. We are installing there seven systems were actually delivering now the last system that are for this year and he's already commit.
Speaker Change: That four additional 10 system next year.
Speaker Change: The main focus of this customer is really moving and closing the facility of the of the screen and moving Joe from screen into digital.
Speaker Change: We have other customers like and Eh meta engine and zoom means that each one of them. We believe will continue to grow with additional.
Speaker Change: Our portals and we already mentioned few others names and like Oh a hybrid.
Speaker Change: At DSS et cetera that will continue to grow with us with the Apollo.
Speaker Change: On top of that we have a list of net new customers and we are putting a lot of focus there and the sales cycle is progressing very very nicely. The aim is that we are building also has strong funnel for 2026 2026 is the ear.
Speaker Change: But we would like to accelerate the number of proposals that we are shifting shipping to the field and we need to build it doing a 2025 awful awful.
Speaker Change: Wally I gave you the answer you were looking for it it helps rather thank you and just one quick follow up what have you said what percentage of the.
Speaker Change: That's installed base has been upgraded to Max out.
Speaker Change: No. We didn't say, we say that most of our installed base already upgraded from Atlas Atlas marks now we are in the process of getting our install base, even to Atlas smacks, plus which progressing very very well are the obvious to us.
Speaker Change: Max plus one of the largest slate that we didnt upgrade yet from Atlas daughter's match is of a global.
Speaker Change: Robust strategic customers as I mentioned, we started to.
Speaker Change: Do some upgrades during Q3 and hopefully it will be a good indication for next year.
Speaker Change: Got it thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. The next question is from the line of Chris Reimer from Barclays. Please go ahead.
Chris Reimer: Oh, hi, Thanks for taking my questions I wanted to ask if you could give any color you did mention in your comments already the traction with the Atlas under the all inclusive model I was wondering if you can comment a little more on that what's the response been.
Speaker Change: And do you have any capacity constraints or are you comfortable with your ability to deliver.
Speaker Change: Relative to demand and and just part he is there did you provide yet a minimum revenue number associated with the AIC model for the Max machine.
Speaker Change: Yes. Thank you.
Speaker Change: So, let's let's first of all understand who fits.
Speaker Change: Adler smacks on as the vessels are Paul on the IC.
Speaker Change: Differentiation is mainly based on volume on the volume that the customer can commit that they can use the system on a annual basis. So for example on their polo women's.
Speaker Change: Without getting into impression the customer need to commit to a 1 million dollar of impression that is moving to.
Speaker Change: Connie this is the revenue that we see on their Paulo, not every customer has such a magnitude of business that they can move to digital there are many many smaller or small and medium sized screen printers that would like to have the agility and flexibility in their own demand.
Speaker Change: End of digital and the quality of core knit, but they cannot afford to have the volume that necessary for their polo and for that the Atlas Max is a great fit.
Speaker Change: On the Atlas Smacks, we gave indication doing Oh investor event.
Speaker Change: The annual revenue that we will receive from those customer using the assets much will be in the range of 300000 impression or at $300000.
Speaker Change: So this is the indication is about one third of the volume.
Speaker Change: And the revenues that we will get from the from their polo.
Speaker Change: We see a great momentum actually in this quarter, we shipped a nice number of systems some of them into totally new customers some of them to existing customers that would like to expand mostly into screen replacement and Ah the funnel.
Speaker Change: <unk> is very healthy moving forward into Q4, and next year and it'll of course, it will contribute significantly to our recurring revenue into next year.
Speaker Change: Okay.
Speaker Change: Great. Thanks.
Speaker Change: Some really good color.
Speaker Change: One more for me around gross margin.
Speaker Change: You commented that.
Speaker Change: A favorable mix this quarter are contributing to the year.
Speaker Change: 50% gross margin and just considering your long term eye at 25, when the when the all inclusive model is fully ramped.
Speaker Change: Wondering where where do you see maybe some pressure coming in over the next year or so.
Speaker Change: Change that or is this a new level going forward.
Speaker Change: So overall as we said on our Investor event, we believe that there's a potential for expansion.
Speaker Change: In the next few years into the 55% gross margin. This expansion some of it will come from the transition of the business is to more impressions. So impression is ink and ink is great margin.
Speaker Change: And moving into more impression if it's full AIC also selling systems with higher capacity will contribute more into the gross margin and this is our fourth was going after big players with a lot of impressions and capturing those impressions are generating.
Speaker Change: Inc.
Speaker Change: With a strong gross margin.
Speaker Change: We believe that you will see also improvement on gross margin over time, one on on the services.
Speaker Change: And of course, selling our systems and increasing the volume.
Speaker Change: Well improve the gross margin so increasing volume of number of systems that we will sell our.
Speaker Change: On Capex will improve as well.
Speaker Change: The gross margin.
Speaker Change: Great. Thanks, that's it for me.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from the line of Brian Drab from William Blair. Please go ahead.
Brian Drab: Hi, Thanks, most of my questions have been answered I just want it round Robin can you.
Speaker Change: Say regarding the.
Speaker Change: Services revenue at any upgrade revenue.
Speaker Change: It just looks like it's flat surface revenue flat year over year or are we seeing material upgrade.
Speaker Change: Revenue in that number in the third quarter service revenue or or will we see that in the fourth quarter.
Speaker Change: Thank you Brian So the reason why you see it flat.
Speaker Change: Compared to last year is that last year, we have significant more upgrades, mainly from Atlas to watch a smacks that included in the service.
Speaker Change: D C youll see less upgrades some of them, we already discussed about the strategic global customer which included in those numbers, but these are significantly less versus last year and this is why you see it flat while other parts of the service contract.
Speaker Change: <unk> is going up.
Speaker Change: And then but you can see this quarter an improvement on the margin gross margin on the services.
Speaker Change: Okay, and then can you just comment at all on how confident you are in your in the manufacturing capability that you have for the Apollo.
Speaker Change: And you know that the.
Speaker Change: Manufacturing partners ability to make 30 of these machines next year.
Speaker Change: And if there's any concerns regarding you know the where you're making them in and you know the.
Speaker Change: Obviously, the unfortunate conflicts that are ongoing.
Speaker Change: All around you.
Speaker Change: Yeah. Thank you. So we have a very strong team working with our contract manufacturers.
Speaker Change: And ramping up the production of the portals for next year are we already see a steep increase in number of systems are producing in Q4 and into Q1 and I have full confidence that we will be able to deliver those set the systems.
Speaker Change: Both from our perspective, and our contract manufacturer perspective.
Speaker Change: As for the situation in Israel, we are taking all the steps.
Speaker Change: Steps are to make sure that Theres no impact on our customers are we build a nice inventory of inc. More than six months of ink in the regions, we have the ability to produce oh ink and consumable in the.
Speaker Change: In case that we would need.
Speaker Change: To close the facility here in Israel.
Speaker Change: Oh spare parts are being produced mainly from outside Israel, and we can ship them all over the world.
Speaker Change: And our systems, we are working with global contract manufacturers like flex and submit.
Speaker Change: The they have their redundancy plans and other places around the world, but that can shift the production. There of course, we are not.
Speaker Change: We are not anticipating that we'd had bandwidth taking all the cautions and.
Speaker Change: We will continue to produce and deliver what needed to our customers.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you. Thank you.
Speaker Change: Ladies and gentlemen, this concludes our question and answer session I would now hand, the conference over to Ronen Samuel for his closing comments.
Speaker Change: <unk>.
Ronen Samuel: Yeah. So thanks, everyone for joining today's call. Please reach out to Jared if you have any other question or interested in follow up calls and otherwise we look forward to updating you on the progress again in the new year.
Ronen Samuel: And I would like to take the opportunity to thank our team for a really great progress on the operational.
Ronen Samuel: Fusion.
Speaker Change: And to all of you for being partners and believing in us. Thank you operator.
Speaker Change: Thank you.
Speaker Change: Flintoff Garnett digital has now concluded. Thank you for your participation you may now disconnect your lines.
Speaker Change: [music].